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May 2, 2006

Houses of Straw

The bad news keeps piling on for home builders. Hovnanian became the latest in the group to report slowing sales and rising cancellations while complaining about construction costs. The company, like Centex, Toll Brothers and others before, also lowered its earnings forecast for the current fiscal year. I suspect that even these lowered forecasts will disappoint as we move forward. None of this news is favorable to the outlook for Building Materials Holding, but until reality slaps traders in their collective faces, the shares may just keep on hanging in there.

Another eventual victim of the housing slowdown will be retail stocks, but their demise may be further off than many bears suspect. Freddie Mac reported that cash-out refinances as a percentage of total refinancing activity ran at its highest level since 1990 during the first quarter of 2006. The percentage was reported at 88%, up from 81% in the fourth quarter of 2005. This report exemplifies how macro processes can take a very long time to reverberate through the economy. Though mortgage rates bottomed in late summer and median home prices have been declining since September, the housing ATM has actually accelerated as home owners rush to get cash before rates rise even further. We will see an even further delay in the topping process for retail shares as this cash is slowly dispersed into the consumer economy.

Yesterday, news of nationalization efforts over Bolivia's oil & gas industries snuck into international headlines, and the news made its way into domestic consciousness today. With gold and silver chugging along, miners were hit over fears that nationalization efforts might become a trend in South America. Newmont Mining and Pan American Silver, two companies with huge, Peruvian-based production, saw their shares hit early for about 5% and 8%, respectively. Peru's political situation is very different from that of Bolivia, so I thought the fears were a bit overblown, and, in fact, both NEM and PAAS recovered nearly all their early losses by day's end. Nevertheless, I am staying away from mining stocks for a bit as I don't like their charts at the moment.

Bonds hung on to small gains today, and remain at an important juncture. As can be seen in the chart below, the 20-year Treasury, as measured by TLT, sits on a support line that provided a launching point for the 2005 rally. This level previously acted as important resistance in 2003 and 2004. Therefore, bonds are either about to bounce sharply or break down decisively.

stock chart

Given this important inflection point, I expect the Fed to attempt to jockey bonds... and the dollar... higher with their usual semantic games, and they have the perfect opportunity to do so at next week's FOMC meeting.

Disclosure: Short BMHC; Long BMHC, TOL Puts


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